Opening Remarks to the Equity Market Structure Advisory Committee Meeting
Chair Mary Jo White
Feb. 2, 2016
Good morning and thank you all for being here. As reflected in today’s agenda, you are continuing to consider a range of the most important and complex market structure issues. At prior meetings, the Committee discussed Rule 611, the Order Protection Rule of Regulation NMS, exchange access fees, and the current regulatory models for trading venues.
Today, the Committee will take up the issues accompanying the market volatility occurring on August 24th and then discuss a number of issues affecting retail and institutional customers, including how certain order types used by customers operate, payment for order flow, and execution quality and order routing disclosure.
We are very pleased to welcome today’s panelists on both topics. They bring with them years of market experience and a great deal of knowledge. Thank you for taking the time to join us and I look forward to hearing each of your views and insights.
We at the Commission, of course, also have a sharp focus on optimizing the structure of our equity markets. Since your last meeting, the Commission issued a proposal to address one significant aspect of trading venue regulation -- transparency of alternative trading systems (ATSs). The proposal seeks to shine a light on how ATSs operate and on the potential conflicts of interest that they may present. The comment period closes on February 26, 2016.
Market Volatility and the Events of August 24th
Your discussion this morning on market volatility and the events of August 24 is both important and timely. As you know, a key element of the SEC’s approach to market structure issues has been to conduct rigorous data analysis. In late December, SEC staff posted a research note on the Commission’s equity market structure website, addressing the operation of U.S. equity markets under the stressed conditions of August 24, 2015. The paper provides detailed empirical data and other information to help assess trading on that day.
Among the issues addressed in the paper are the opening and reopening processes at the primary listing exchanges, the effects of market volatility on trading in certain ETPs and corporate stocks, and the operation of the limit-up/limit-down pilot plan on a day with market-wide volatility. I know that members of this Committee and our panelists have also reviewed issues raised by the events of August 24 and look forward to hearing their views on potential responses.
The August 24 paper and other analyses will help provide a sound empirical basis for further consideration of steps to refine current trading rules in order to optimize the operation of controls over volatility.
Issues Affecting Customers in the Current Equity Market Structure
Your second panel will consider how market structure affects retail and institutional customers. To facilitate this discussion, the staff posted a memorandum on the Committee’s webpage that summarizes several important issues affecting customers.
One topic discussed is the use of certain order types – specifically, market orders and stop orders. These order types may present potential risks to investors, especially during periods of short-term market volatility.
A second important issue for customers is payment for order flow. Payments by OTC market makers to retail brokerage firms for marketable retail customer order flow is a long-standing practice. The Commission has stated that a broker accepting payment for order flow does not necessarily violate its best-execution obligations. But the Commission has also recognized that the existence of payment-for-order-flow arrangements raises the potential for conflicts of interest for broker-dealers handling customer orders.
Still another issue impacting customers is disclosure to inform them of how their interests are being served by their broker-dealers. Some market participants have recommended that enhancements be made to the execution quality and order routing disclosures required by Rules 605 and 606 of Regulation NMS. Again, your agenda today is spot-on in considering potential improvements to these rules, as SEC staff is developing a rulemaking proposal to enhance the required disclosures, including how to enhance transparency of the order routing practices of broker-dealers for institutional investors. I look forward to hearing your views as to whether and how these rules can continue to provide meaningful information, and possible ways to enhance the disclosures for all investors.
At your last meeting, the Committee formed four subcommittees focused on: (i) Regulation NMS; (ii) Trading Venues Regulation; (iii) Customer Issues; and (iv) Market Quality. Since October, the subcommittees have been hard at work and, as part of today’s agenda, each subcommittee chair will provide a brief status update on their respective subcommittees. I look forward to hearing their reports.
Let me close by thanking you again for your commitment of your time and expertise to the work of the Committee. Your perspective and ideas are invaluable as we examine how to optimize today’s equity markets.